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Is a Minimum Wage an Appropriate Instrument for Redistribution?

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  • Aart Gerritsen
  • Bas Jacobs

Abstract

We analyze the redistributive (dis)advantages of a minimum wage over income taxation in competitive labor markets. A minimum wage causes more unemployment, but also leads to more skill formation as unemployment is concentrated on low-skilled workers. A simple condition based on three sufficient statistics shows that a minimum wage is desirable if the social welfare gains of more skill formation outweigh the social welfare losses of increased unemployment. Using a highly conservative calibration, a minimum wage decrease is shown to be part of a Pareto-improving policy reform for all countries under consideration, except possibly the United States.

Suggested Citation

  • Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo.
    • Handle: RePEc:ces:ceswps:_4588
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    Cited by:

    1. Lavecchia, Adam M., 2020. "Minimum wage policy with optimal taxes and unemployment," Journal of Public Economics, Elsevier, vol. 190(C).
    2. Simon, Andrew & Wilson, Matthew, 2021. "Optimal minimum wage setting in a federal system," Journal of Urban Economics, Elsevier, vol. 123(C).
    3. Gerritsen, Aart, 2017. "Equity and efficiency in rationed labor markets," Journal of Public Economics, Elsevier, vol. 153(C), pages 56-68.
    4. Aronsson, Thomas & Johansson-Stenman, Olof, 2021. "A note on optimal taxation, status consumption, and unemployment," Journal of Public Economics, Elsevier, vol. 200(C).
    5. Hummel, Albert Jan & Jacobs, Bas, 2023. "Optimal income taxation in unionized labor markets," Journal of Public Economics, Elsevier, vol. 220(C).

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    More about this item

    Keywords

    minimum wage; optimal redistribution; unemployment; education;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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